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Medical Sales & Consulting Group; et al v. Plus Orthopedics Usa

October 25, 2011

MEDICAL SALES & CONSULTING GROUP; ET AL., PLAINTIFFS,
v.
PLUS ORTHOPEDICS USA, INC.; SMITH & NEPHEW, INC., DEFENDANTS.



The opinion of the court was delivered by: Hon. Roger T. Benitez United States District Judge

FINDINGS OF FACT AND CONCLUSIONS OF LAW

FOLLOWING BENCH TRIAL

INTRODUCTION

Two Plaintiff groups remain in this litigation: (1) Precision Medical, Inc. and Chris Nichols ("Nichols"); and (2) Precision Orthopedics, Inc., Emmett Bonamarte, and Cindy Bonamarte ("Bonamarte").*fn1 Plaintiffs, independent sales representatives and their companies, entered into sales agreements to sell Defendant Plus Orthopedics, LLC's medical implants in defined territories. Nichols alleges that Defendants Plus Orthopedics, LLC and Smith & Nephew, Inc. ("Defendants") breached the express terms of his sales agreement, violated the covenant of good faith and fair dealing, and violated a state sales commission statute. Bonamarte alleges that Defendants failed to pay him pursuant to a change-in-control provision in the sales agreement and violated state sales commission statutes.*fn2

The Court held a five-day bench trial on June 21-24 and 28, 2011.*fn3 Having weighed the testimony and evidence introduced at trial and considered the parties briefs preceding, during, and following trial, the Court issues the following findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52(a).

FINDINGS OF FACT AND CONCLUSIONS OF LAW

The Court incorporates the facts stipulated to by the parties in the April 8, 2011 Pretrial Order. Plaintiffs entered into sales agreements with Plus to serve as independent sales agents for Plus' medical implants. Plaintiffs marketed and sold Plus products in their defined territories. Plaintiffs were responsible for educating doctors about Plus' products, supplying doctors with the products, and providing support services to doctors, including bringing necessary products and instruments for implantation to surgery and providing technical advice about the use and implantation of the products. Under the terms of their respective sales agreements, Plaintiffs were entitled to commissions on the sales of Plus products. On June 1, 2007, Smith & Nephew acquired Plus and succeeded to Plus' obligations under the sales agreements.*fn4

Nichols' and Bonamarte's claims are significantly different and the Court's findings of fact and conclusions of law reflect that difference. Bonamarte claims that Defendants breached the sales agreement by failing to pay him 150% of his prior 12-months' sales pursuant to the sales agreement's change-in-control provision or provide a comparable designation. Bonamarte also claims that the 150% payment constitutes an unpaid commission. Nichols claims that Defendants breached express terms of the sales agreement by failing to provide technical expertise, soliciting Nichols' sales force, failing to negotiate quota, and failing to timely pay commissions. Additionally, Nichols claims that Defendants violated the covenant of good faith and fair dealing by re-branding Plus products, excluding Nichols from meetings and trainings, depriving Nichols of sales information and needed supplies of products and instruments, denying sales support, and halting new product development.

I. Bonamarte Findings of Fact

Bonamarte entered into a sales agreement with Plus on August 1, 2003 to serve as the exclusive sales representative of Plus products in Illinois. The sales agreement contained a changein-control provision that provided as follows:

In the event of a sale of all of the assets of Plus, the merger of Plus into another company or the sale or exchange of more than 50% of the stock of Plus during any 2 year period (other than a recapitalization or restructuring in which the direct or indirect change in control of Plus is less than 50%), any successor company created by such sale, merger, or other change in control ("Successor Company") shall have the obligation to provide Representative with a comparable designation to that provided to Representative in this Agreement. If Representative believes that Representative has not been comparably designated by the Successor Company, Representative shall provide written notice of the perceived inadequate terms of the designation within 30 days of the designation from the Successor Company. Upon receipt by the Successor Company of such notice, the Successor Company shall have 30 days to re-designate Representative. In the event that Representative believes that such re-designation is still not a comparable designation, Representative shall provide written notice to the Successor Company within 10 days of Representatives' receipt of such re-designation. Upon receipt of such notice from Representative, the Successor Company shall have the option to arbitrate Representative's designation in San Diego, California, in accordance with the rules of the American Arbitration Association. Upon receiving the arbitrator's decision, Successor Company shall either re-designate Representative in accordance with the terms of the arbitrator's ruling, or, in the alternative, shall pay Representative an amount equal to 150% of the total sales by Representative of Product in the Representative Territory during the previous 12 months.

While there are certainly deficiencies in the clarity of the steps, the Court has identified five steps the parties were required to complete.

(1) Defendants provide Bonamarte with a comparable designation

(2) Bonamarte provides written notice of the perceived inadequate terms of the designation within 30 days of the designation

(3) Defendants have 30 days to re-designate Bonamarte

(4) Bonamarte has 10 days from re-designation to provide written notice if Bonamarte believes the re-designation is still not a comparable designation

(5) Upon receipt of notice from Bonamarte, Defendants have the option to arbitrate the designation and upon receiving the arbitrator's decision, re-designate Bonamarte in accordance with the arbitrator's ruling or pay Bonamarte 150% of the total sales during the previous 12 months

A. Creation of the Sales Agreement

The sales agreement was negotiated between Emmett and Cindy Bonamarte and David Lorenzi, Chief Executive Officer of Plus. While Mark Distin, a Regional Sales Manager and Director of Sales for Plus, was involved in recruiting Bonamarte and engaged in communications with Bonamarte, he testified that he did not negotiate or draft the sales agreement on behalf of Plus. Bonamarte insisted on the inclusion of the change-in-control provision and drafted the provision, although Mr. Lorenzi negotiated the 150% of the prior months sales down from the 200% initially sought. Bonamarte insisted on the inclusion of this provision to protect Bonamarte in the event that Plus was acquired by another company. The sales agreement did not contain a non-compete clause.

"Comparable designation" is not defined in the sales agreement and it does not have a commonly accepted definition in the industry. The only industry expert to testify, Plaintiff's expert R. Bruce Phillips, testified that the term is not generally used in the medical device industry and that in his years in the industry he had never encountered this term in this industry. Bonamarte believed that a comparable designation would constitute the exclusive right to sell not only Plus products in his territory, as he had before a change-in-control, but additionally, the exclusive right to sell all the acquiring companies' products in that same territory, despite the acquiring company having its own sales representative already selling the acquiring companies' products in that territory.

B. Correspondence Concerning Comparable Designation

Bonamarte was not immediately contacted by Smith & Nephew about his status following the June 1, 2007 acquisition. On August 10, 2007, Bonamarte sent an email to Defendants expressing disappointment in not being offered the distributorship and requesting that Defendants honor the buy-out clause of the sales agreement and pay Bonamarte one and one-half times his sales over the past twelve months, approximately $1.9 million. In this first communication, Bonamarte did not attempt to address Defendants' obligation to provide a comparable designation.

Nor did he acknowledge Defendants' option to arbitrate, but rather immediately demanded the 150% of the prior 12-months' sales. Having observed Bonamarte's demeanor, when considered with the tenor and timing of this correspondence, the Court is left with the definite impression that Bonamarte was not interested in a "comparable designation," but was more interested in going straight to payment of 150% of the past 12-months' sales, which, as discussed below, would have been a windfall.

On September 24, 2007, Defendants responded by email that Defendants would honor the August 2003 sales agreement and that Bonamarte's status as a sales representative remained unchanged.*fn5 On September 27, 2007, Bonamarte sent a letter to Defendants indicating that a comparable designation had not been provided, that the letter was providing written notice that Defendants had not provided a comparable designation, and asserting that Defendants had thirty days to re-designate Bonamarte.

On October 16, 2007, Defendants sent a letter to Bonamarte, asserting that the change-in-control provision had not been triggered, but that if it had, a comparable designation was provided in the September 27, 2007 email. The letter then quotes the portion of the September 27, 2007 email that explained that Bonamarte's status remained unchanged and that Defendants would continue to honor the contract. The letter specifically goes on to "reiterate that Smith & Nephew and Plus [would] honor the terms of the Agreement, and that your client remains a duly-authorized sales representative subject to the terms of the Agreement until its expiration on December 31, 2007." On December 6, 2007, Bonamarte sent a letter to Defendants disputing Defendants' assertion that the sales agreement terminated on December 31, 2007, referenced the October 16, 2007 letter, and asserted that he had not received a comparable designation. Bonamarte sent another letter to Defendants on December 18, 2007 noting the sales agreement should run until December 31, 2008 and asserting that he had not received the comparable designation required by the sales agreement. Defendants responded to the December 18, 2007 letter on December 26, 2007 and advised Bonamarte that the sales agreement was renewed for an additional year, expiring on December 31, 2008.

Bonamarte responded to the December 26, 2007 letter on January 4, 2008 and again claimed that Defendants had not provided the comparable designation required by the change-in-control provision. Defendants did not seek arbitration and Bonamarte was not paid 150% of his prior 12-months' sales as demanded by Bonamarte.

II. Bonamarte Conclusions of Law

Bonamarte alleges that Defendants failed provide him with a comparable designation or payment of 150% of his prior 12-months' sales in breach of the sales agreements' change-in-control provision.*fn6 Bonamarte has failed to establish that Defendants breached the contract because Bonamarte did not establish that he met his obligation under the sales agreements' change-in-control provision. Bonamarte also did not establish that the designation provided by Defendants did not constitute a comparable designation. Even if Bonamarte had complied with the change-in-control provision's requirements and Defendants' breached by failing to provide a comparable designation, Bonamarte would still not be entitled to the 150% payment because it constitutes an invalid penalty. Additionally, Bonamarte claims under the Wisconsin and Illinois sales commission statutes also fail because they are based on an entitlement to the 150% payment.

A. Bonamarte Did Not Comply With the Requirements of the Change-in-Control Provision

"It is elementary a plaintiff suing for breach of contract must prove it has performed all conditions on its part or that it was excused from performance. Similarly, where defendant's duty to perform under the contract is conditioned on the happening of some event, the plaintiff must prove the event transpired." Consol. World Invs., Inc. v. Lido Preferred Ltd., 9 Cal. App. 4th 373, 380 (2nd Dist. 1992) (internal citations omitted).

Defendants' duty to pay Bonamarte 150% of his prior 12-months' sales was conditioned on Bonamarte timely responding to designations he found unsatisfactory. The parties each attempt to plug the communications between the parties into steps most advantageous to each's position. But, as the finder of fact, the Court must weigh all the evidence, including the correspondence itself, the timing of the correspondence, and the testimony of witnesses. Based on all the evidence, the Court must determine where the parties' correspondence fits within the numerous steps of the change-in-control provision. The Court finds as follows.

Defendants completed step one by providing Bonamarte with a comparable designation on September 24, 2007 when Defendants indicated that Bonamarte's status as a sales representative remained unchanged and Defendants would honor the contract. This was indisputably the first communication from Defendants to Bonamarte concerning Bonamarte's status following the acquisition and treating it as the first designation is consistent with the time limits for response articulated in Bonamarte's September 27, 2007 correspondence. The Court rejects Bonamarte's claim that this could not constitute a comparable designation because the designation indicated the sales agreement expired on December 31, 2007. The sales agreement does not indicate when the sales agreement automatically renews for the additional year. Additionally, Bonamarte's next communication, disputing the designation, fails to identify the December 31, 2007 end date as an inadequate term of the designation.

To comply with step two, Bonamarte had to provide written notice of the perceived inadequate terms of the designation within 30 days. Bonamarte met step two by responding on September 27, 2007 and indicating that a comparable designation had not been provided, that the letter constituted written notice that Defendants had not provided a ...


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